First published in the Daily Maverick 168 weekly newspaper.

The looting and rioting that have laid waste to a swathe of businesses in KwaZulu-Natal and Gauteng in the wake of former president Jacob Zuma’s jailing will curtail economic growth this year but are not expected to spark a rate cut this week when the central bank’s Monetary Policy Committee (MPC) meets.

The consensus from a Reuters’ poll of economists is that the MPC will hold the South African Reserve Bank’s (Sarb’s) key repo rate steady at 3.5%, leaving the prime rate for consumers at 7%, with a hike on the cards early next year. Rates were slashed by an unprecedented 300 basis points last year in the face of the extraordinary economic meltdown triggered by the Covid-19 pandemic and the lockdowns to contain it.

Some analysts see a hike sooner rather than later.

“Our reading of the Sarb’s rhetoric in recent weeks is clear: rates cannot remain at record lows forever and Sarb favours starting policy normalisation in H2 2021 and not in 2022, as Reuters consensus estimates currently imply,” Jeff Schultz, senior economist at BNP Paribas South Africa, said in a commentary note on the upcoming MPC.

“We expect Sarb to tee up a gradual normalisation cycle at its July MPC meeting, hiking in both September and November and taking the end-2021 repo rate to 4.0%.”

Of course, “normalisation” would imply a “normal situation” and South Africa’s wildly distorted political economy, always abnormal at best, is currently bug-eyed and baying at the moon.

Factors that could stay Sarb’s hand for the remainder of this year include the extent of the economic damage inflicted by the worst social unrest in decades – which is saying something in a country that has had over 2,000 recorded service delivery protests since 2004, according to data compiled by consultancy Municipal IQ.   

PwC estimates that economic growth could be 0.4 percentage points lower in 2021 because of the ongoing unrest and that 50,000 jobs could be at risk, but all such estimates at this stage are very preliminary and much will depend on restoring order to key transport routes and the reopening of supply chains.

Sarb’s revised growth forecast will be of more than passing interest when the MPC’s decision is unveiled on Thursday, 22 July. Its forecast in May was for growth of 4.2% in 2021 after a 7.0% contraction last year.

The rand’s performance will also be a key factor in the trajectory of monetary policy. According to Bloomberg, the currency was knocked off its pedestal this week as the best-performing emerging market currency in 2021 to date.

But it put in slight gains on Thursday morning, 15 July, and was fetching around 14.50 to the dollar after US Federal Reserve chair Jerome Powell signalled that America’s central bank would likely keep rates low despite mounting inflation concerns. The lingo at play here is “search for yield” – meaning there is still enough of a gap between US and South African rates for investors to profit from putting money into rand assets.

The rand has also been underpinned by surging prices for key commodity exports which have translated into hefty trade, terms of trade and current account surpluses. But that hinges on getting the exports out through ports, notably Durban, and key economic arteries such as the N3 were still blocked as we went to press.

South African consumer inflation sped to a 30-month high in May, accelerating to 5.2% from 4.4% in April.

But this was in line with expectations, was largely a result of base effects and remains within Sarb’s 3% to 6% inflation target.

Economists by and large do not expect the target to be breached this year. This should also help to stay the MPC’s finger on the rate trigger.

And the rebuilding that will be required by businesses big and small in the wake of the devastation will require a tsunami of credit. Keeping that relatively cheap will be crucial. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores until 24 July 2021. From 31 July 2021, DM168 will be available for R25 at Pick n Pay, Exclusive Books and airport bookstores.